Who's Minding the Store?; JDN Realty Is in Disarray After a Series of Disclosures

First the founder was in charge. But then came an accounting scandal, and he stepped aside -- sort of. Replacing him were two other executives: his wife and the man who oversaw accounting. But then another accounting scandal became public yesterday, and they stepped aside, too -- sort of.

Who's running the company this morning? A member of the board who has supposedly been overseeing the company's executives since the day it went public in 1994.

This is JDN Realty, an Atlanta-based real estate investment trust that was one of the industry's most respected firms in the 1990's. It is also one of the prime developers for Wal-Mart Stores. But in the last two months, JDN disclosed that it had been making under-the-table payments to two of its own executives for years, that it improperly billed its two largest clients, that it defaulted on its main bank loan and that it would have to restate all of its earnings since 1994. Law firms across the country have filed class-action lawsuits. With the latest announcement yesterday, JDN's stock has dropped 43 percent since February.

''The more you look into this, the stranger it gets,'' said Patrick S. McGurn, a vice president at Institutional Shareholder Services, which advises large investors on corporate governance issues. ''There is so much wrong with this that it's almost the plot for a satire.''

More seriously, management experts say, JDN's travails offer a case study of the problems that can befall a public company that continues to operate like a private one. At a time when companies are going public at a record rate, and many are flouting widely accepted management guidelines, the lessons are particularly relevant. At the core of JDN's troubles, corporate governance specialists say, is a board that is too closely aligned with management to be an effective advocate for shareholders. The directors are a small inbred group -- mostly men who have business ties to JDN or personal ties to J. Donald Nichols, the founder, and his wife, Elizabeth. Most have been board members since the company went public in 1994. The board even lacks a nominating committee.

JDN executives, through a spokesman, and board members declined to comment. A lawyer investigating the company's problems on behalf of the board said the directors had aggressively responded to the company's problems. ''The interests of the shareholders have been paramount in their minds,'' said John Latham, a partner at Alston & Bird in Atlanta.

To analysts and investors, however, JDN's problems -- jeopardizing almost every relationship the company has and undercutting its financial statements for the last six years -- are deep enough that an independent board would have discovered them sooner. Even after they become public, the company has reacted in ways that have ensured bad news will continue to dribble out, the critics say.

In February, for example, Ms. Nichols was one of two JDN executives on a conference call to analysts in which she emphasized that Mr. Nichols, her husband, did not seem to have benefited personally from the off-the-books payments. And yesterday the company said it would not publish its 1999 earnings by the end of this week, violating a two-week extension it had previously received from the Securities and Exchange Commission.

The company also acknowledged yesterday the billing ''discrepancies'' in previous deals with its two largest customers, Wal-Mart and Lowe's, a home improvement retailer. The problems, which analysts said amounted to overstating costs, leave JDN open to legal claims from the two companies, it acknowledged.

After the market closed yesterday, Mr. Nichols resigned as chairman, according to Mr. Latham. Mr. Nichols had already stepped aside as chief executive in February.

Now JDN faces the difficult task of regaining the trust of clients, analysts and investors who say they still have little solid understanding of the company's problems.

''Those things cause you to lose a significant amount of confidence in management,'' said one investor who has sold JDN shares in the last two months.

And Wal-Mart and Lowe's, the two companies JDN wrongly billed for the construction, leasing and sale of shopping malls, are now conducting their own inquiries, spokesmen for the companies said.

''Anytime we have to pay something we shouldn't, we take that very seriously,'' said Les Copeland, the Wal-Mart spokesman. If anything, he added, ''We're going to overreact to it and manage it very carefully.''

Until recently, Mr. Nichols seemed to have a golden touch. After five years playing minor league baseball in the Baltimore Orioles' system, he switched to the business world, joining J. C. Bradford & Company, a Nashville investment firm, according to a 1998 article in Forbes magazine about his art collection,

He then struck out on his own, getting his first break by helping Wal-Mart build a store near his boyhood home in Franklin, Tenn. His real estate business expanded in the 1980's, thanks in part to Wal-Mart's rise as the nation's biggest retailer. JDN went public in March 1994, and its stock consistently outperformed other real estate investment trusts, giving shareholders a 79 percent return between January 1995 and January 2000. Real estate indexes returned about 50 percent during that same period.

JDN ''had a superior growth rate and a predictable earnings stream,'' said Andrew Jones, a real estate analyst at Morgan Stanley Dean Witter. ''People really understood how they made money.''

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The executives did it by establishing solid relationships with the country's strongest retailers like Wal-Mart and Home Depot. JDN won a reputation for finishing its projects on time and, seemingly, on budget. Retailers, Mr. Jones said, ''will pay a little bit more for predictability.'' In the highly leveraged real estate business, a small amount of additional cash flow makes a big difference to profits.

All the while, JDN continued to operate with largely the same board it had on the day it went public. Until Mr. Nichols resigned yesterday, it included him and Ms. Nichols, along with William B. Green, a bank and real estate executive who knew the Nicholses from Tennessee, where the couple continue to live; Craig Macnab, a Nashville financial executive who also once worked at J. C. Bradford, one of the underwriters of JDN's first stock sale; and Haywood D. Cochrane Jr., a Nashville health-care executive who says he met Mr. Nichols through mutual friends shortly before JDN's initial public offering.

Of the two directors who have joined in the last six years, one is William G. Byrnes, a retired Alex. Brown executive whom Mr. Nichols recently praised for the vital role he played in shepherding JDN's public offering. The other, Philip G. Satre, is the president of Harrah's Entertainment and also has a Tennessee connection. For years, he was based in Memphis as a hotel executive.

The best evidence of the coziness between the directors and executives, critics say, is the lack of a nominating committee on the board. Without one, the choice of directors often falls solely to the chief executive. ''That in itself ends up leading to a lot of cronyism on boards,'' said Ann Yerger, the director of research at the Council of Institutional Investors. ''You want to know there are at least one or two independent directors asking the hard questions.''

Three-quarters of public companies in the United States have nominating committees, according to a recent study by Korn/Ferry International, a recruiting firm.

But executives of many public real estate investment trusts, known as REIT's, often continue to run them more like the private firms they once were, governance specialists said. As REIT's have stumbled in recent years, investors have turned more attention to their management structures. At the Council of Institutional Investors' annual meeting last summer, its members held a specific discussion about the industry, Ms. Yerger said.

At JDN, management experts said, a more independent board may not have been able to prevent the off-the-books payments, but it probably would have responded more forcefully once the scandal broke.

On Feb. 14, the company announced that two executives, Jeb L. Hughes and C. Sheldon Whittelsey, had received $4.9 million in payments that JDN's earnings statements did not reflect. Many of the payments, the company said, were approved by Mr. Nichols. The payments, which analysts said could have come in the form of cash or real estate, ranged from 4 percent to 20 percent of JDN's annual earnings between 1994 and 1998.

Mr. Nichols may have made the payments, Mr. Jones at Morgan Stanley said, in an attempt to retain the executives at a time when private real estate firms were doing much better, and paying more, than public REIT's.

The company offered no explanation, however. It did announce that Mr. Nichols was stepping aside as chief executive but that he would remain chairman, in charge of maintaining ''tenant relationships.''

Under the circumstances, the company should have immediately dismissed Mr. Nichols, said Mr. McGurn, the shareholder adviser, rather than ''talking about reassigning him to other duties in the corporation.''

Mr. Latham, the board's lawyer, said the directors initially chose to weigh Mr. Nichols's mistakes against the importance of his ties to big clients. ''It's a business decision the board had to make,'' he said.

Ms. Nichols and JDN's chief financial officer, William J. Kerley, then took over as co-chief executives, and the board began investigating the payments, as well as searching for a new chief executive. Yesterday, Mr. Kerley resigned, Ms. Nichols returned to her job as company president, and the board named one of its members, Mr. Macnab -- the former J. C. Bradford employee -- to the top job.

Analysts and investors, meanwhile, are still trying to figure out when the next piece of news will come and what it will contain.

''I've heard so many different things, I don't really know what's true and what's not,'' said Jessica C. Tully, an analyst at Wachovia Securities in Atlanta, who downgraded JDN's stock to ''sell'' yesterday.

Correction: April 15, 2000, Saturday An article in Business Day on Thursday about troubles at JDN Realty misattributed a statement made during a February conference call held by Elizabeth Nichols, the company's president, and William J. Kerley, a former executive. Mr. Kerley said that the company's former chairman, J. Donald Nichols, did not appear to have benefited personally from improper payments made to other employees. The statement was not made by Ms. Nichols, who is married to Mr. Nichols.